Opinion: Housing market poised for faster growth

BarryD. Wood

Columnist

WASHINGTON: Stan Humphries of online property firm Zillow believes this is a great time to buy a home. With mortgage rates low and home prices still not back to pre-crash levels, Humphries says home affordability has seldom been better.

As the Zillow chart below shows, servicing a new mortgage on average is absorbing 15% of household income — well below recent norm —while renting is taking about 30%. “Renting,” says Humphries, “has never been this expensive.”

Eight years after the housing bubble burst, recovery has been slow and uneven. Richard Koss, chief economist at mortgage giant Fannie Mae says, “housing led us into recession but has been slow to lead us out.” Even with home prices nationally nearly back to 2007 levels, Koss says housing starts are way below historic trends while mortgage originations are one-third lower than at the peak.

Recent data on housing is positive. The Commerce Department reports that housing starts in September rose to a seasonally adjusted annual rate of 1.2 million units, the sixth straight month in which starts were above 1 million. Nationally home prices are expected to rise 3% this year.

Likewise, home builders have turned optimistic. An index of home builder confidence at the National Association of Home Builders is at a 10-year high. David Crowe, NAHB chief economist, says with solid job creation and pent-up demand, “we expect housing to keep moving forward as we start to close out 2015.”

But with mortgage rates below 4%, the economy growing, and lower gas prices saving consumers up to $1,000 this year, why hasn’t the housing recovery been faster?

The answer is that prospective first-time buyers often don’t have the 10% to 20% down payment required for a mortgage. And despite rising home prices many owners wanting to move up still have mortgages that exceed their home’s market value. The negative equity problem, however, is fast improving. RealtyTrac estimates that about 7 million households are seriously underwater compared to nearly 13 million in 2012.

At a recent housing forum sponsored by the National Association of Business Economics, both Humphries and Koss identified anomalies in the post-bubble housing market. Humphries said renters are having a particularly tough time in hot markets like San Francisco, San Jose and Los Angeles.

San Francisco is very expensive no matter what. But if you can get a mortgage, he says, it’s cheaper to buy than rent. Owning in SF, says Humphries, takes 41% of household income versus 47% to rent.

Koss of Fannie Mae says the housing recession brought down the home ownership rate from an unsustainable 69% to a more normal 63%. More people are renting, the main reason that rents have been rising faster than home prices.

In terms of ownership Koss says Baby Boomers are the biggest winners. “They comprise 25% of the population but control 50% of the home equity,” he says.

As the chart above shows, Koss says it is Millennials and Gen Xers who are having the hardest time.

While the housing market is not back to normal, it is much healthier than two years ago. And both Humphries and Koss see continued growth ahead. Humphries told the business economists, “household formation has picked up, a sign that the demand for housing will continue to be strong.” Koss said, “the housing thaw is finally underway.”

Barry Wood is a Washington-based journalist who writes about the economy.

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